I understand the instinct entirely… at the end of the day, this isn’t a random AI bottleneck equity we’re talking about, where the worst-case scenario has real world consequences you could measure with a microscope.

It’s oil.

And the ripple effect of the oil price is huge and pervasive. I’m not going to insult anyone by pretending the move has been trivial - the price has roughly doubled since the start of the year, as one of the world’s main shipping arteries is looking like a lifelong Heart Attack Grill regular: clogged and slowed to a trickle.

This has all been an absolute boon for mainstream media, with headlines doing what headlines do best: sensationalizing every potential development to the maximum.

What I’d put to you is that almost everyone has found themselves in a deeply committed relationship with the price - the one figure that’s impossible to miss - while there are some equally important figures deserving of attention.

Let me take you through what I am watching and how I see the pieces fit together, because the conclusion I have landed on is profoundly unexciting.

“I think the boring thing happens” is not the stuff of viral threads, I’m well aware of that, and I have long since made my peace with it.

Painful Pumps & Panic Producers

The war is real, the disruption is real, and I am not here to wave any of it away. Crude has climbed something in the region of one hundred percent measured from where it started the year, which is a serious move by any standard and quite enough to ruin the quarter for anyone who was leaning the wrong way.

Context is key here, and the history is where the panic starts to lose its footing.

When the Arab producers turned off the taps in 1973, oil didn’t merely double, it ran up by something closer to three hundred percent and then sat there stubbornly elevated, for the better part of a decade.

When Iraq rolled into Kuwait in 1990, the price comfortably more than doubled inside a few weeks.

Those were the genuine article, supply shocks that rearranged the global economy and left scorch marks on an entire generation of investors.

What we have now is sharp, painful at the pump, but also, by the brutal standards of a real oil crisis, fairly contained.

A doubling off a low base is not nothing, but nor is it the apocalypse the more excitable corners of the internet are busy pricing in.

The gap between “this hurts” and “this is 1973” is the gap between an awkward year and a structural catastrophe, and the market is currently making a hash of telling the two apart.

That disconnect is where it gets interesting, because when the price action is screaming “crisis” while the size of the move is muttering “managed disruption”, it usually tells you that the people doing the screaming are working off the headline and the people doing the muttering are working off the data.

Countdown to Disaster…Or Maybe Not?

The number I actually care about is about as glamorous as a gas meter.

Every serious oil-consuming nation keeps an emergency stash, or to put it more professionally, a strategic reserve, for exactly the sort of moment we’re living through.

In the US it is called the Strategic Petroleum Reserve, or SPR for short, and it exists so that when the world’s supply suddenly gets difficult, the government can ease open the tap on its own stockpile and take the edge off the price before anyone has to start queuing at the gas station.

And that’s what has been happening. Around late March the reserve started visibly draining, and it’s been draining since.

On the face of it that sounds like exactly the sort of thing you would do in a panic, and the doom crowd has duly seized on it, running the simple arithmetic.

If you assume the reserve keeps emptying at the pace it has been, a straight-line projection leaves you with somewhere around nine months of it before the tank runs dry.

Nine months... cue the columns about America running on fumes.

Except the straight line is the wrong way to read it. The current drawdown is not a sale... It’s structured as an exchange, which is a polite way of saying it’s a loan dressed up in a barrel.

The oil that is leaving now is contractually due to come back, with the first returns scheduled from around November this year.

So the “nine months to empty” figure isn’t a countdown to disaster, it’s a snapshot of a deliberately temporary measure, designed from the outset to be refilled.

It’s a simple but important distinction, and it changes the way you read the move quite significantly.

A government genuinely terrified of a permanent supply crisis doesn’t tend to lend its emergency oil out on a return ticket.

The fact that the reserve is being run down on an exchange basis, with the refill already written into the paperwork, tells you the people in charge are treating this as a bridge to cross, not a cliff to fall off.

They’re buying time, and they are doing it in a way that assumes there will be a calmer world on the other side in which to top the tank back up.

When the behavior of the big actors (the government) and that of the spectators (you, me, and average Joe) point in opposite directions, the big actors are usually the ones worth watching.

People panic with their mouths, but they reveal what they actually expect with their actions.

Tick-Tock Election Clock

Now layer the timing on top, and this is where it stops looking like coincidence and starts looking like choreography...

And boy has the market been dancing.

In the same window that the reserve began draining, the man at the top started behaving like someone who very much wants this over.

On March 23^rd he announced a pause on striking Iranian energy infrastructure, citing what he described as productive conversations.

A few days later, on the 26th, he extended that pause and declared that talks were going, in his words, very well.

The fact that Tehran promptly denied any such friendly talks and dismissed the American proposal as one-sided only sharpens the point rather than softening it.

One side is publicly insisting the negotiation is going splendidly while the other insists it’s barely happening.

Both of those postures can serve the same purpose, which is to keep the temperature down while the real work goes on behind the scenes.

You don’t pause your own bombing campaign twice, and start talking up the diplomacy, while simultaneously draining your strategic reserve to hold the price down, unless your overriding priority is to stop this thing escalating.

Every one of those moves points in the same direction, and none point to an administration settling in for a long war.

And then there’s the calendar that really matters… the political one.

There are midterm elections this year and there’s no surer way to lose them than to preside over a real energy crisis, with gas prices on the news every evening and households watching their weekly fuel bill climb.

A long, hot oil war running straight into an election is roughly the political equivalent of scheduling root canal surgery for the morning of your wedding.

The incentive to get this resolved, and to be seen getting it resolved, is enormous and it is getting more enormous by the week.

You can see the same instinct bleeding into the wider region, too.

There has been visible pressure applied to get Israel to ease off in Lebanon, which isn’t the move of someone trying to widen the conflict.

It’s the move of someone trying to drain the pressure out of the whole system so the oil can start flowing again at the earliest possible moment.

Put the reserve, the pauses, the talk of talks, the election clock, and the regional throttling-back side by side, and a picture forms that the price action simply isn’t reflecting.

Almost everyone with the power to make this worse is instead behaving like someone desperate to make it better.

I’ll Never Go Viral… But I’ll Never Go Broke

There’s one serious cost to all this, and it isn’t the one filling everyone’s feed; the price of a barrel is the smallest part of it.

What I’m thinking of creeps up slowly, doesn’t show up on a chart, and gets a great deal more expensive the longer it runs.

Any guesses?

The petrodollar.

For decades the world has bought and sold its oil in dollars.

That arrangement, often shorthanded as the petrodollar, is one of the load-bearing pillars under American financial dominance, because if everyone needs dollars to buy energy, then everyone needs dollars, full stop.

It’s the house taking its cut on every hand of cards dealt anywhere on the planet.

What a conflict like this does the longer it runs, is hand other players a reason to stop using the house’s chips.

A growing share of oil trade is settling outside the dollar, and a conflict that puts a major producer under pressure only speeds up the hunt for alternatives.

Iran’s willingness to take payment in other currencies isn’t a desperate improvisation but a sophisticated play, an attempt to show everyone watching that the dollar isn’t compulsory.

This is the part the US can’t afford to let run.

A spike in the oil price is a bad quarter; the slow erosion of the dollar’s grip on global energy is a bad century.

If you want to know why I’m so confident this gets resolved rather than left to fester, it isn’t sentiment and it isn’t optimism, and it’s definitely not because I’m some oil aficionado.

It’s simply because the real cost of letting it drag on isn’t measured in barrels, but in the one thing the United States can’t afford to lose its grip on, which is its monopoly on the world’s money.

Which brings me to the question everyone is actually asking, even if they’re asking it badly.

Does this drag on or does it resolve, and what on earth is a sensible person supposed to do with the oil price while we wait to find out?

I have a fairly firm view on both, and it’s not the view the world of viral tweets would want me to have.

The exciting answer is to back the truck up on oil and brace for escalation.

The answer I have actually arrived at is considerably more boring.

I’ll now lay out where I think this lands, why China of all places holds more of the cards than Washington would care to admit, and what I am personally doing about it, which is… almost nothing.

Almost.

What Do Airplanes and Oil Prices Have in Common?

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There has been no announcement, no press conference, and no carefully staged photo opportunity. He has simply started turning a very large dial in the opposite direction to the one the entire market had assumed it was about to turn, and the remarkable thing is how few people seem to have noticed him doing it.

I only noticed because I keep an eye on a handful of data series that most well-adjusted people don’t take the time to, which tells you roughly everything you need to know about the state of my social life. My wife has long since accepted this is how I like to spend my time, in the same way one accepts a partner who collects stamps or talks to the cat. My cat, for what it’s worth, finds my antics tedious.

The number in question is the size of the Fed’s balance sheet, which is simply the grand total of everything the central bank happens to be holding at any given moment, and for the past couple of weeks it has been quietly misbehaving. It has started to shrink. Not dramatically and not in any way that has troubled a single headline, but steadily and persistently enough that I’ve stopped filing it under noise and started filing it under intent.

This is roughly the financial equivalent of noticing that your famously frugal uncle has sneakily stopped topping up the punch bowl at his own party. Nobody else has clocked it yet, everyone is still having a grand old time. But the man with his hand on the ladle has plans, and they aren’t generous ones.

Here is why that ought to make you sit up a little straighter in your chair. Firstly, it’s good for your posture and preventing a future of looking like the hunchback of Notre Dame, but more importantly, the entire market is currently transfixed by the wrong hand – the one without the ladle.

The market is watching the interest rate and holding its breath for the first cut, reading each syllable the new Chair utters with the strained devotion of a medieval priest inspecting a goat’s liver for favorable omens.

That is the loud and theatrical half of monetary policy, the half that moves mortgages and leads the evening news, and it’s where the crowd always gathers to gawp.

Meanwhile the quieter half, which is simply how much money the Fed is pumping into or pulling out of the system, tends to tell you considerably more about what’s actually coming, and at the moment it is telling a story that flatly contradicts the one the rate-cut crowd has so cheerfully talked itself into.

What made me really take notice was the timing of the thing. The balance sheet carried on growing quite merrily right up until the week the Fed changed hands, and it has been shrinking ever since, which is either a coincidence of heroic proportions or the first faint sign that the new man intends to run the place rather differently to the last one.

I’ve spent enough time in and around this business, and if there’s one thing it has beaten into me, it’s a deep suspicion of coincidences that arrive this neatly gift-wrapped.

A market tends to be at its most interesting in precisely these moments, when it is busy contradicting itself and hasn’t yet thought to check its own arithmetic, and there is a contradiction exactly like that sitting in plain sight today, tucked discreetly behind a number that almost nobody can be bothered to watch.

Given the choice, I would far rather be a fortnight too early to something like this than spend the back half of the year explaining to myself why I sat on my hands and watched it unfold in front of me.

So let me walk you through how I’m reading it, because the order in which all this has unfolded matters far more than any single piece of it in isolation.

Right, How Did We Get Into This Mess

For a couple of years the Fed had been letting its balance sheet run down, allowing bonds to mature without replacing them and steadily draining reserves out of the banking system. Which worked perfectly well until it didn’t.

By late last year reserves had grown scarce enough that the overnight funding markets started to show real strain, with repo rates spiking in a way that made the Fed a little shaky in their boots, because it’s the early warning that they’re losing their grip on the very rate they’re trying to set.

So they did the predictable thing and started buying short-dated paper again to put reserves back. They’ve gone to considerable lengths to insist this isn’t a return to easing, just a spot of routine technical housekeeping, and they’ve chosen their words with great care. I don’t much care what they call it.

Money going back into the system is money going back into the system, whatever’s written on the paperwork, and a system being topped back up behaves accordingly.

The labor market, for one, has held up rather better than the AI-layoff panic earlier in the year insisted it would, which is more or less what you’d expect when liquidity is quietly being added, and is part of why I’m fairly confident that’s what was going on. So the robots aren’t coming for all of our jobs just yet. Reports of our collective redundancy, it seems, were somewhat exaggerated.

What interests me more is why they felt they had to. The official story is that the strain was confined to the money markets, and I’m not convinced that’s the top and bottom of it. The thing that’s been quietly swelling for years now is private credit, the vast and largely unwatched world of lending that happens outside the banking system. Essentially the wild west of the financial world.

When a pool of risk that size starts to seize up it doesn’t stay politely in its own corner, because all of this is wired together, and liquidity that disappears somewhere you can’t see has a habit of resurfacing as stress somewhere you can. I suspect the repo trouble the Fed rushed to patch was the visible edge of a problem sitting a good deal further out of view.

That was roughly the picture heading into spring. The Fed quietly topping liquidity back up, the system straining in places that don’t make the evening news, and an inflation picture that simply refused to cooperate, with fuel prices pushing higher, producer prices running hot, and the case for cutting rates getting harder to make with every release rather than easier.

That was the world the new Chair walked into.

New Sheriff, Same Saloon

In the middle of May the Federal Reserve got a new Chair, Kevin Warsh, confirmed by one of the narrowest margins in the institution’s history. I’m going to leave the politics of how he got there well alone, partly because it isn’t what we’re here for and partly because it’s genuinely the least interesting thing about him.

What actually matters is what he’s been telling everyone and their grandma’s dog for the best part of post-Covid years is that the Fed’s balance sheet has grown into something monstrous and ought to be a great deal smaller.

Warsh has spent the years since the financial crisis as one of the more consistent skeptics of the Fed’s swollen balance sheet you could hope to find. He sat on the Board during the crisis and backed the first round of emergency bond-buying in 2008, but he broke with the program when the Fed went back for seconds in 2010, and he’s been uneasy about the sheer size of the balance sheet ever since. That discomfort has only sharpened in the years since the pandemic ballooned it to a scale nobody could have imagined back then.

He resigned from the Board in 2011, walking away from one of the most powerful economic seats in the world, his unease with the direction of policy no secret at the time.

He has also spent years in the orbit of his mentor and business partner, the one and only Stanley Druckenmiller. Now if you’re reading this, Mr. Druckenmiller likely needs no introduction, but on the off chance you need a refresher, this is a man who isn’t exactly shy about expressing his views, and who has spent a good few years now calling the Fed’s money-printing roughly what he thinks it is, free money, growing rather louder about it since 2020.

Whatever else you make of Warsh, this is not someone who inherits a few trillion dollars of accumulated easing and decides to leave it all precisely where he found it.

There are two things going on here that the market seems to be having real trouble holding in its head at the same time, an increasingly common problem might I add. Jerome Powell, the predecessor, was cautious by temperament and ran the Fed accordingly. He ran what he openly called an ample-reserves regime, keeping plenty of liquidity in the system and perfectly willing to tolerate a bit more inflation if it meant nothing broke along the way.

Powell would rather run things slightly too loose than risk a seizure. Warsh’s instincts run in exactly the opposite direction. He wants the balance sheet smaller, and he’s likely to let it shrink faster and further than Powell would ever have allowed.

The market understood this the moment he was nominated, and you could read it most clearly in gold and silver, the assets that care most about whether the dollar holds its value and that tend to rally the instant people start worrying about debasement.

They sold off sharply on the news, as you can see in the chart above. And I know some of you will look at the chart and say the run up was caused by retail FOMO mania, but retail having money is just a side effect of the Fed’s expanding balance sheet (remember GameStop?). That’s the market handing you its own conclusion, and the conclusion it reached was that Warsh is far more likely to defend the currency than to quietly let inflation do the awkward work on his behalf.

Which brings me back to that shrinking number. A balance sheet that had been growing suddenly going into reverse, in the exact window a years-long balance-sheet hawk takes charge, against an inflation backdrop that hands him every excuse to keep draining.

I don’t believe that’s an accident, and if I’m right about it, then the trade that’s made me good money all year is now sitting on the wrong side of what comes next. There’s one particular corner of the market where this shift pays off twice over, and I started moving into it this week.

So I’ll stop boring you and get into the nitty gritty of where my mind, and money, is.

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